Companies limited by Guarantee

Tony Forster

A company limited by guarantee is an alternative type of incorporation used primarily for non-profit organisations that require corporate status.

A guarantee company does not have a share capital, but has members who are guarantors instead of shareholders. The guarantors give an undertaking to contribute a nominal amount towards the winding up of the company in the event of a shortfall upon cessation of business. It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary.

The biggest benefit of incorporating a company limited by guarantee, is that those managing the company are not personally liable for any debts the organisation may incur. There are several other benefits.

Companies Limited by Guarantee are normally incorporated for non-profit making functions. The company has no share capital. A company limited by guarantee has members, rather than shareholders. The members of the company guarantee/undertake to contribute a predetermined sum to the liabilities of the company which becomes due in the event of the company being wound up, normally £1. The Memorandum normally includes a non-profit distribution clause and these companies are usually formed by clubs, professional, trade or research associations.

After incorporation the company can be registered with the Charity Commission for charitable purposes.

There are no shareholders in this type of company, and profits are reinvested in the company.

Advantages:

– They have legal identities separate from its members

– Individual members are almost totally protected against liability

– They can buy and sell property in the name of the organisation

– Companies are generally democratic organisations – they have a   membership

– The majority of voluntary organisations do not have to have the word limited in their title

– Registration with The Register of Companies is quick

– A company limited by guarantee is normally registered for non-profit making functions.

– The company has no share capital.

– It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary.

– Guarantee companies are useful for non-profit organisations that require corporate status. This means that its profits are not distributed to its members but are retained to be used for the purposes of the guarantee company

Some Disadvantages

1. Establishment Costs

A company limited by guarantee can be expensive to establish. It is almost certain that you will need a lawyer to get the documentation in order and to advise you on the company’s ongoing regulatory and filing requirements.

2. Disclosure and Reporting Requirements

The administrative requirements on a company are more onerous than for incorporated associations. A company limited by guarantee will be subject to the disclosure requirements that apply to public companies. The Act imposes financial reporting and auditing obligations on companies.

3. The Name of the Company

Generally, companies limited by guarantee must use the word “limited” or the abbreviation “Ltd” in their name.  To do so, the company must pursue charitable purposes only and apply its income in promoting those purposes; must not make distributions to its members or pay fees to its directors; and the directors of the company must approve all other payments the company makes to its directors.

Tony Forster
tforster@metcalfes.co.uk
0117 9453 040


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